Industrial N Illinois

Midwest becoming a key player in e-commerce world

E-commerce companies are flocking to the area, helping to drive the industrial RE sector.

Industrial tenants working in the e-commerce space demand one thing above all else: supply chain efficiency.

As Michael Marconi, managing broker with Transwestern's industrial practice in Rosemont, Illinois, says, "E-commerce users want to be as close as possible to the customer. It's the 'last mile' factor."

Marconi gives a personal example. He's heading off soon to a ski trip. But because he doesn't ski on a regular basis, Marconi ordered five ski coats online. He scheduled next-day delivery, tried on all five jackets, kept the one that fit him best and returned the others.

This desire for next-day delivery isn't confined to Marconi. Far from it. A growing number of customers want their items delivered quickly, often by the very next day after they order them.

Because of this, industrial users are increasingly seeking distribution centers and warehouses that are located as close as possible to as many potential customers.

This is good news for the brokers and developers located across the Midwest. Because of its location in the center of the country, the Midwest is a prime location for e-commerce companies seeking to shorten the time it takes to ship their products to their customers.

The Midwest distribution hub

By dotting the Midwest with distribution facilities and warehouses, e-commerce giants -- especially Amazon -- can boost the efficiency of their supply chains. Just look at what Amazon's done: The e-commerce company last year and this has opened new warehouses everywhere from Southeast Wisconsin to the heart of the Kansas City market.

"Their warehouses are all around us," Marconi said. "They need to be so close to as many customers as possible. We are all expecting deliveries that are faster and faster. This isn't going to change."

This demand is already changing the industrial market. Just look at newly built industrial facilities. Developers know that e-commerce companies are taking over a greater number of industrial buildings. To meet this need, developers are building industrial facilities that boast the large truck courts, 32-foot ceilings and high-tech indoor sprinkler systems that e-commerce users demand.

Others are adding unusual amenities, everything from on-site gyms to restaurant-quality cafeterias to babysitting centers, Marconi said. These amenities can help e-commerce users find the more talented employees that they need to compete.

"The rise in e-commerce has fueled a fight for employees," Marconi said. "As these companies fight for employees, they search for ways to make themselves different, to stand out from their competitors. That might be larger cafeterias or on-site gyms."

Tim Thompson, executive vice president and managing director of industrial brokerage with Chicago's HSA Commercial Real Estate, said that the rise of e-commerce has changed the physical structure of industrial facilities that are getting built today.

"Builders are getting bigger," he said. "Ceiling heights are getting higher. There's been a significant physical change because of e-commerce."

Thompson, though, says that he doesn't expect too many other major physical changes to hit industrial buildings in the near future, even with the continued rise of e-commerce. There will be future changes, no doubt. But Thompson doesn't see these changes coming in the next two to three years.

"I think we're entering a couple of years now where we won't see as many physical changes with industrial buildings for a few years," he said. "I don't think we'll be going to 40-foot clear heights as a norm. In a couple of years, that could happen. It is happening in other parts of the country. But I think we have a little bit of time still before that happens here."

Filling in existing spaces

Marconi said that the push in 2017 will come from developers and owners that want to fill up the vacancies in their existing industrial warehouses and distribution centers. Marconi said that there is still a significant amount of vacancies in the industrial sector in his market, the Chicago area.

The owners of these buildings are hoping to fill in these empty spaces in 2017, he said, something that might cut down on the development of newer, spec buildings throughout the region.

As of the end of 2016, the industrial sector in the Chicago area stood at about 8.5 percent, Marconi said. That's not a bad rate, but it is an increase from the end of the third quarter.

"I think right now, people will be a bit more careful coming out of the ground," Marconi said. "They'll be focusing more on backfilling until they get that vacancy rate down."

E-commerce users can play a role in these efforts, Marconi said. These users are starting to gobble up space in tertiary markets across the Midwest, purchasing smaller industrial buildings with lower -- 24-foot -- ceilings. Again, it comes down to a desire to be closer to their clients.

Marconi said that e-commerce users are relying on these smaller buildings not to serve as their main warehouses, but as smaller, distribution points, facilities designed to help them deliver their products to more of their customers in less time.

Chicago, especially, has become an important market for e-commerce users, Thompson said. Its central location and access to rail lines and highways are two positives that are attracting the Amazons of the world.

"The population base alone is important," Thompson said. "The same positive elements of this market that have been around for years are playing into Chicago's importance to e-commerce. Then there's also the labor pool here. There is a good supply of labor here, skilled labor. Couple that with the population base and the great highway access, and Chicago is very important to these e-commerce end users."

Another trend? The big-box retailers will continue to scale back their brick-and-mortar physical locations and boost their online businesses, Marconi said. The big question, of course, centers on what will happen with all the big-box locations that these retailers close as they focus more of their efforts on online sales.

"It's hard to predict what will become of all these empty spaces that this online trend will leave behind," Marconi said.

A good guess? Developers might transform these large spaces into non-traditional uses, such as seniors housing or healthcare centers.

The Chicago industrial market is a good example of how strong this sector is in the Midwest. Cushman & Wakefield, in its year-end Chicago industrial report, said that the overall vacancy rate in the Chicago industrial market stood at 6.3 percent at the end of 2016. Cushman & Wakefield reported, too, that the market saw 22.7 million square feet of industrial absorption.

Developers are busy here, with Cushman & Wakefield reporting that 20.8 million square feet of industrial space was under construction at the end of 2016.

Of course, e-commerce users played important roles in the city's industrial market. E-commerce tenants signed the second- and third-biggest industrial leases last year, closing leases for just under 955,000 square feet in the area's Southern Fox Valley and 627,000 square feet in Lake County.

While e-commerce has been a boon to the industrial markets across the Midwest, it hasn't been as kind to retailers. Marconi predicts that this trend will only continue, while researchers at Cushman & Wakefield said that the most recent holiday season showed a disparity in online and brick-and-mortar retail sales.

Overall, holiday retail sales grew 4 percent in 2016, a strong showing, according to Cushman & Wakefield. Yet e-commerce sales far eclipsed brick-and-mortar sales.

"The big challenge, if you're in bricks and mortar, is did you feel much love?" asked Ben Conwell, e-commerce fulfillment practice group leader with Cushman & Wakefield.